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Pakistan Economy: SBP ramps up monetary tightening

• SBP raised the policy rate by 50bps to 6.5% (discount rate 7.0%) in its May’18 MPS, which was in line with our expectations. The central bank attributed little respite in deteriorating external account and recent core inflation crossing the 7.0% mark, which is likely to be sticky, in our view.   
• This takes overall increase in CY18TD to 75bps, while we expect total 150bps rate hike during CY18, in light of inflationary pressures, challenges on the external front and likely entry into IMF program post elections. However, we flag that further sharp hikes in the remaining year (CY18) cannot be ruled out.
• We expect CPI for May’18 to clock in at 4.3% YoY, compared to an average of 3.8% YoY earlier in FY18. Food inflation – which had held CPI modest uptil now – is expected to grow 2% YoY; otherwise, there will be little MoM change in other key indices. Importantly, core inflation is estimated to rise 7.1% YoY (up 7.0% YoY in Apr’18).